Federal Election 2021: Liberals Stay in Power With Minority Government

Liberal Platform Brings New Stimulus While Widening The Deficit

• The Liberal Party campaigned on a platform that would introduce close to $80 billion in new spending over the next five years. Although it’s unlikely to unfold exactly as prescribed, the platform as originally envisioned would inject greater stimulus into the economy, while also leading to moderately wider deficits over the medium term.
• Indeed, the costing of the platform shows a larger deficit in each year for the next five years compared to the Parliamentary Budget Office’s (PBO) baseline forecast (Table 2). As a result, the debt burden, measured using the debt-to-GDP ratio, remains higher than the PBO projection, with the discrepancy growing every year. By 2025-26, the Liberal platform’s debt-to-GDP ratio is 2.3 percentage points (ppts) higher than the PBO estimate. Notably, other major parties had drawn up fiscal plans that would also lead to even larger deficits over the next several years.  
• Although the ratio would be maintained at a higher starting-point, the Liberal platform did maintain a downward trajectory. According to the platform, the debt-to-GDP ratio is projected to fall by 2 ppts from 48.5% in 2021-22 to 46.5% in 2025-2026.
• With the Liberal Party promising new outlays, GDP growth could be stronger in 2022 and 2023. But as stimulus wanes, there could be small fiscal drag in 2024 (Table 3). Breaking it down, the platform committed around 40% of the planned spending in fiscal year 2021-22 and 2022-23. When translated to calendar year, it implies an impact in the range of 0.2 to 0.5 ppts in 2022 and 0.1 to 0.2 ppts in 2023. We have provided ranges for the economic impact due to uncertainty around multipliers. Given the economy will be further along in the recovery when stimulus is rolled out, we expect the contribution to growth from new spending to be on the lower end of the estimated range.
• There are a number of commitments contributing to wider deficits. To name a few, the extension of COVID-19 support programs, increased health transfers, and a string of promises on the housing market front are big ticket items in the Liberal platform. The planned introduction of employment insurance for self-employed Canadians is also a high spend promise. Policies on climate change and the promotion of clean technology are noteworthy potential outlays as well. A table summarizing major promises is provided in the Appendix.
• On the other side of the ledger, the Liberals plan to introduce many measures to boost revenues by $25.5 billion in the next five years. Around 40% of this amount is expected to be raised through a 3% surtax on the largest banks and insurers as well as a “Canada Recovery Dividend” which would place an additional levy on these businesses for the next four years. The Liberal platform also assumes that a more stringent Canada Revenue Agency can generate $12 billion over the medium term.  Other personal tax measures such as a minimum tax for top earners, and a vaping tax, round out the revenue side of the Liberal fiscal plan.

  Table 2: Liberal Platform Promises Modestly Wider Deficits

  Source: Parliamentary Budget Office, Liberal Party of Canada.

  	2021-22	2022-23	2023-24	2024-25	2025-26
  PBO Baseline	-138.2bn	-42.7bn	-35.6bn	-24.8bn	-24.6bn
  Net Changes	-18.7bn	-20.0bn	-14.0bn	-10.1bn	-7.5bn
  Platform Projection	-156.9bn	-62.7bn	-49.6bn	-34.9bn	-32.1bn
  Platform Debt/GDP	48.5%	47.6%	47.6%	47.2%	46.5%
  Difference, Debt/GDP	0.8pp	1.4pp	1.8pp	2.2pp	2.3pp

   

  Table 3: Liberal Platform Positive for Growth In Near-Term

  Note: GDP growth impacts estimated off PBO baseline. Source: TD Economics.

  	2022	2023	2024	2025
  GDP Growth Impact (p.p.)	0.2 to 0.5	0.1 to 0.2	0 to -0.1	0.0

Shared commitments could mean greater policy action by minority government

• Given the minority status of the incoming Liberal government, it is uncertain as to which platform promises will be enacted. The Liberals may have to seek compromise with other major parties to implement parts of their fiscal plan.   
• That said, there are many priorities that overlap between the Liberals, Conservatives, and NDP, raising the prospect of substantial policy moves in the near future. Figure 1 in the Appendix shows the commonalities of parties on important policies. Judging by recent experience, Conservatives would not be expected to support a Liberal agenda or fiscal plan, meaning that the Liberals would be outlining an agenda that could receive the support of one or more of the other parties.
• The first such measure that could receive multi-party support is the extension of COVID-19 programs and the introduction of enhancements to the employment insurance program. The minority government will probably waste no time in finding opposition party backing to pass pandemic support measures in the coming months. 
• Increasing housing affordability is another commonality among all parties. With significant overlap in the respective platforms on plans to lower the barrier to entry for homeownership while also boosting housing supply, it is likely that we will see new housing policies from the minority government. 
• Health care funding could also see a meaningful boost. Canada’s health care system has come under the microscope during the pandemic, and each major party platform proposed increasing transfers, although with different aims. Since the Liberals, NDP, and Green parties championed additional targeted support for mental health, and long-term care, among other initiatives, overall health care outlays are likely to see a bump up in the future. 
• The Liberal minority will not have to seek agreement with every major party to push through new policies. With support from just the NDP, where the Liberals share greater policy and historical cooperation, important measures can be enacted such as the 10 days of paid sick leave for federally regulated workers, hiking corporate tax for banks and insurers, and higher tax on top earners. 
• If the Liberal minority looks for support from the NDP, that may result in additional fiscal outlays as the party’s platform had called for over $200 billion in new spending over then next five years. This would further increase Canada’s fiscal deficit. 

Liberal Housing Platform Should Have a Mixed, But Ultimately Benign Impact on Prices 

• As noted previously, Canadian political parties have identified housing affordability as a crucial issue in their campaign platforms. There were many similarities among housing plans, so its reasonable to expect tangible policy action by the minority government on this front.
• The Liberal party’s platform will likely form the basis for future legislation. The party’s housing plan was a multi-layered one, which included several proposals to put more money in the pockets of both first-time and other home buyers. At the same time, it had measures to boost housing supply, as well as a tax on properties sold which are held for less than 1 year (with several exception). The plan also notably included a temporary ban on foreign buying.
• Overall, we judge that their plan will be mildly demand supportive over the next few years. Preliminary modelling suggests that sales could be slightly higher by the end of 2023 relative to baseline (with a very modest, but positive impact on prices) as the proposed 2-year ban on foreign buying is more than offset by income support measures and the move to raise the cut-off for CMHC insured mortgages from $1 million to $1.25 million.
• Notably, the latter could unlock a greater share of the market for purchasers, but also might worsen affordability, and could result in larger mortgages being taken on, creating some risk for the financial system. Demand could strengthen further after the next few years if the ban on foreign buying is removed, with an attendant boost to prices.
• An important takeaway relates to when these policies will impact the market. The Liberal costing plan implies a start to both demand and supply enhancing measures in FY 2022/23. However, while demand could see immediate support from the plan, it would take some to create new supply. This implies that affordability could worsen a touch at first, with any potential relief through new supply coming with a lag.

Figure 1: Areas Of Overlap Exist Between All Parties

Appendix: Summary of Key Party Promises By Major Area

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